Short in May and Go Away

They have a PR campaign trying to maintain this rally. You can use as many CAPS as you want and a 3% gain isn’t too newsworthy. JP Morgan (JPM) will soon have their credit card exposure drag the stock much lower. And another powerful indicator — foreclosures — just rose to record levels. Add in General Growth filing the largest U.S. real estate bankruptcy in history and it is peculiar that both the Dow Jones U.S. Real Estate Index and market reacted by rallying strongly. It seems to me like the situation is worsening but the markets want so badly to see the rally continue. Many are convinced that a bottom is in. While I would be happy to see the economy begin to recover, it is highly dubious that we have seen the worst of things.

Investors often sell in May and go away for the Summer. Low volume and sluggish performance so the theory goes. But I think this May will prove a better opportunity to Short in May and Go Away. Just don’t go too far. Our strategy involves quickly limiting losses whenever the market moves against one of our trades.

It seems like a good time to short the market with a few of our favorite ultrashort/leveraged ETFs:

Ultra Short Real Estate: SRS

Ultra Short Financials: SKF

These funds are at all-time lows and the downside seems pretty limited compared to the potential gains should these funds retrace even half way to recent highs.

You can go broke diversifying. Ask anyone who’s diversified in the last three years. They’ve lost money. Nonprofessionals are always jumping around, thinking they have to do something. If they have a big success, they think they need another one right away. That’s when hubris sets in at its worst. That’s when people really should go to the beach. It happens to me too. - Jim Rogers

Comments

[drbob66:]

Yeah, maybe. Or maybe not.

It probably seemed like a good time to buy the SKF and SRS last week, too...because "things are going to get worse." Turned out it wasn't (as the charts show).

Is today the right time? Or, sometime in May? Only the price action will tell you...and price is the only thing that counts. Right now it's telling me that it's too early to short.

"These funds are at all-time lows and the downside seems pretty limited..." Really? What exactly is the downside for this ETF? What's a "reasonable price" for the SKF? The SKF was at an all-time low on Wed...until it made a new low yesterday.

The author is right about one thing..."Just don’t go too far. Our strategy involves quickly limiting losses whenever the market moves against one of our trades." The question is: how much are you willing to lose? Or, better yet: why risk losing any money on a thesis that's been wrong for the last six weeks straight?

The SKF is a short-term trading vehicle only...and a tricky one at that. Why bother? For the sheer thrill of it? For the chance to say, "Look, I was right!"?

I say, watch the price action...and wait for a confirmed downtrend (lower highs, and lower lows) on the XLF. Until then...step aside. There are better opportunities that don't involve fighting the trend (and the Fed).

Apr 17 08:33 AM

[investor88:]

Short in May and go away. Always the possibility this is right move.

Apr 17 09:29 AM

[Mad Hedge F...:]

It's looking more likely. Will someone please help me out here? Q1 is widely expected to be the quarter from hell, with earnings expected to plummet by 38%, and the market rockets 26%, the biggest hyperbolic move since 1930. Is there a disconnect here? I know I only got a magna cum laude in math in college, not the summa cum laude I deserved (my professor didn’t understand his subject and hated me for it). But is it possible that the market has gotten ahead of itself? Just a tad? Is the economy really going to have the massive bungee cord type recovery that the market is discounting here? Could we be setting up for the perfect sell in May and go away scenario, like we saw last year? I don’t get this. I await your comments in earnest.

Apr 17 11:40 AM

[HardwoodFlo...:]

Mad Hedge fund Guy that comment looks familiar.

Chief- here's a history lesson. The market could not keep up with the bad news in the late summer/fall. The market droped to 55% or something. OK. The freeze starts to thaw and some of the information (economic) starts to get a little better, not a lot, so the market tries to get back for it's over shoot and in step with the tepid economic data. So, what will decide what happens in the markets in the future, how do we get back to normalcy. Well when the data is consistent then the markets will respond to the data. If the info get's worse than it was in the fall- for some reason- then the market's will fall back to their lows. From here I would expect we go up and down with a slight tick up over the next 3 months. IF things don't get better hold on toyour hat- if they do you and all your stupid posts will be wrong. Then you can take that and your "Cum Laude" down to the local tavern in SF and tell everyone how you got cleaned out by betting against the market (you see the three guys who got that right everyone knows you no one does).

Apr 17 04:06 PM

[PROXIMO:]

Short this market with impunity.

Apr 17 04:21 PM

[Alan Young:]

Dr. Bob is totally correct. Taking a short is one thing--the price goes up or down, and you can use stops to limit your losses. Using a leveraged ETF to short is quite another, because tracking is distorted by volatility in the underlying index.

SRS is a perfect example. IYR tracks the same index directly, and is down -10% YTD. So SRS, like a good leveraged short, should be UP about 20%, right? But in fact, it's DOWN 40%! This is the risk you run trying to use a leveraged-inverse fund to short. It works great when there's a strong trend; but any volatility over a period of weeks or even days will kill you.

This is not a secret. Anyone who thinks that market going down = 2x short ETFs going up just hasn't done any homework.

Apr 17 09:44 PM

[InvestBaboo:]

Another cup half-full guy who is trying to guess where the market is going rather than following it. Like they say there is a fool born every day!

Apr 18 01:32 PM

[woodsey:]

A modicum of math stood me in good stead when I was trying to EARN a living. I didn't think I would ever mention math and bungee cords in the same breath, but I just did. Now I don't depend on either. It's mainly emotional from now on.

Apr 18 06:05 PM

[realold:]

Excellent point and comments. Thanks.


On Apr 17 09:44 PM Alan Young wrote:

> Dr. Bob is totally correct. Taking a short is one thing--the price
> goes up or down, and you can use stops to limit your losses. Using
> a leveraged ETF to short is quite another, because tracking is distorted
> by volatility in the underlying index.
>
> SRS is a perfect example. IYR tracks the same index directly, and
> is down -10% YTD. So SRS, like a good leveraged short, should be
> UP about 20%, right? But in fact, it's DOWN 40%! This is the risk
> you run trying to use a leveraged-inverse fund to short. It works
> great when there's a strong trend; but any volatility over a period
> of weeks or even days will kill you.
>
> This is not a secret. Anyone who thinks that market going down =
> 2x short ETFs going up just hasn't done any homework.

Apr 18 06:31 PM

[CLH:]

SRS and SKF are both losers if shorting.

Apr 18 08:27 PM

[Rocknbob:]

SRS , SKF and FAZ will all come back fiercely over the the next few months, as data / earnings come out.

Apr 20 02:10 PM